John Haraden

ECON – 2010 – Carson

ePortfolio Assignment

Microeconomics is the study of how individual firms, households, and people choose to allocate
their limited resources. The decisions of each of these groups can be greatly affected by decisions
made by the others. In this course we learned many concepts regarding the economy. One of the
major concepts we learned is how firms decide how much of a good to produce and, in turn, how
individuals decide how much of a good to buy. These are known as the laws of supply and
demand.
Supply and demand are both responsive to the price of a good. As the price of a good increases,
the quantity of the good supplied increases and the quantity demanded decreases. When prices
increase, producers have a greater incentive to supply more of a good or service since they will
make more profit in doing this. Also, when prices increase, consumers have less incentive to
purchase the goods or services due to having to spend more of their limited funds on this, thus
demand decreases.
Quantity supplied, and quantity demanded can be plotted as two separate curves on a graph.
The price of the good or service is located on the vertical axis and quantity produced or
demanded is located on the horizontal axis, these curves demonstrate the responsiveness of
quantity supplied and quantity demanded to different price points. Demand is a downward
sloping curve due to its inverse relationship with the price of a good or service. Meaning, the
higher the price, the less demand there is. Supply is an upward slope due to higher prices leading
to higher quantities supplied.
So, why are knowing quantities supplied and quantities demanded, at each given price, so
important in economics? In order to determine the most efficient quantity to produce and what
price to charge, producers must figure out the point where the supply and demand curves
intersect. This point is known as the equilibrium price and equilibrium quantity. When
equilibrium is achieved in a market, the quantity of goods and services supplied are equal to the
quantity demanded. When a market is not producing at equilibrium, there will be a surplus, which
is where too much of a good or service is supplied, or a shortage, where too little of a good of
service is supplied. Whenever production is not at equilibrium, economic pressures will arise to
push production back toward the point of equilibrium.
Supply and demand are never set in stone. There are many factors which can affect quantities
supplied or quantities demanded. Let’s say a producer finds a new, more efficient technology
used in production of their good or service. This new technology will lower costs to the producer
which will allow the producer to supply greater quantities at every price point. This will cause the
supply curve to shift out, to the right causing the equilibrium price to decrease. The same concept
applies to the demand curve. Let’s say the government lowers taxes for the majority of
consumers. These consumers will now demand a greater quantity of goods and services due to
their increase in disposable income. This will cause the demand curve to shift out, to the right
which will cause the equilibrium price to increase.
Having an understanding of supply and demand is one of the most important aspects to an
efficiently functioning economy. When firms have a great understanding of these laws, they are
able to be more efficient in production and when consumers understand these laws, they are
more able to make informed purchasing decisions.